| Back pay,contract
gratuities, deferred pay and arrears of pay (including relate-back)
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| Back pay,contract gratuities,
deferred pay and arrears of pay resulting from an award of
salary or wages, whether received by an employee during the
course of employment or upon or after cessation of employment,
is taxable. However, the employee may apply to have such lump
sum payment related back to the service period in respect
of which the payment is made. Where the service period exceeds
3 years, the relating back will be made at a constant rate
over 36 months ending on the date of entitlement to the payment
or the date of cessation of employment (if applicable), whichever
is the earlier.
Application for relating back can generally be made at the time
tax return is filed. The IRD will relate back the lump sum only
if it will reduce the employee's overall tax liability.
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Example 1 (service
period for which the sum paid is less than 36 months) |
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Mr. CHAN was employed
on contract terms. His contract covered the period from 1.4.2005
to 30.9.2007 (30 months). Upon completion of the 30-month contract
on 30.9.2007, he received a gratuity of $300,000. He may |
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treat the whole sum of
$300,000 as his assessable income for year of assessment 2007/08,
or |
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(b) |
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apply for relating back
to the contract period (i.e. a 30-month period) so as to reduce
his overall tax liability for the years taken together. The
apportionment of the gratuity to the years would be ¡V |
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Year of Assessment |
$ |
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2005/06 (1.4.05 - 31.3.06) |
120,000 |
¡]12 months/30 months¡^ |
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2006/07 (1.4.06 - 31.3.07) |
120,000 |
¡]12 months/30 months¡^ |
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2007/08 (1.4.07 - 30.9.07) |
60,000 |
¡] 6 months/30 months¡^ |
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300,000 |
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Example 2 (service
period for which the sum paid is less than 36 months) |
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On 30.6.2007, Mr. LEE's employer
resolved to make a lump sum payment in the amount of $120,000
to recompense his services rendered on Sundays and public holidays
during the period from 1.1.2005 to 31.12.2006. Mr. LEE may |
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treat the whole amount of such payment
as his assessable income for year of assessment 2007/08, being
the year he was entitled to claim the payment pursuant to his
employer's resolution of 30.6.2007, or |
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(b) |
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apply to have the payment related
back to the service period in respect of which the payment was
made with a view to reduce his overall liabilities for all the
relevant years taken together. The apportionment of the lump
sum payment to the years would be: |
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Year of Assessment |
$ |
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2004/05 (1.1.05 - 31.3.05) |
15,000 |
¡]3 months/24 months¡^ |
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2005/06 (1.4.05 - 31.3.06) |
60,000 |
¡]12 months/24 months¡^ |
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2006/07 (1.4.06 - 31.12.06) |
45,000 |
¡] 9 months/24 months¡^ |
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120,000 |
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Example 3
(service period for which the sum paid exceeds 36 months) |
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On 30.6.2007, Mr. LEE's
employer resolved to make a lump sum payment in the amount of
$210,000 to recompense his services rendered on Sundays and
public holidays during the period from 1.7.2002 to 31.12.2006
(54 months). Mr. LEE may |
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treat the whole amount
of such payment as his assessable income for year of assessment
2007/08, being the year he was entitled to claim the payment
pursuant to his employer's resolution of 30.6.2007, or |
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(b) |
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apply to have the payment
related back to the 36 months immediately before 30.6.2007.
The apportionment of the payment to the years would be: |
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Year of Assessment |
$ |
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2004/05 (1.7.04 - 31.3.05) |
52,500 |
¡]9 months/36 months¡^ |
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2005/06 (1.4.05 - 31.3.06) |
70,000 |
¡]12 months/36 months¡^ |
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2006/07 (1.4.06 - 31.3.07) |
70,000 |
¡]12 months/36 months¡^ |
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2007/08 (1.4.07 - 30.6.07) |
17,500 |
¡]3 months/36 months¡^ |
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210,000 |
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In this case, the service
period in respect of which the lump sum payment was made exceeds
3 years. Therefore, the payment will be related back at a constant
rate over 36 months ending on 30.6.2007, that being the date
on which Mr. LEE was entitled to claim the payment. |
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Example 4
(employment ceased, service period for which the sum paid exceeds
36 months) |
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On 30.6.2007, Mr. LEE's employer
resolved to make a lump sum payment in the amount of $210,000
to recompense his services rendered on Sundays and public holidays
during the period from 1.7.2002 to 31.12.2006 (54 months). Mr.
LEE's employment with his employer has already ceased on 31.3.2007.
Mr LEE may |
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treat the whole amount
of such payment as his assessable income for year of assessment
2006/07, as the date of cessation of employment falls within
2006/07, or |
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apply to have the payment
related back to the 36 months immediately before 31.3.2007.
The apportionment of the payment to the years would be: |
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Year of Assessment |
$ |
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2004/05 (1.4.04 - 31.3.05) |
70,000 |
¡]12 months/36 months¡^ |
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2005/06 (1.4.05 - 31.3.06) |
70,000 |
¡]12 months/36 months¡^ |
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2006/07 (1.4.06 - 31.3.07) |
70,000 |
¡]12 months/36 months¡^ |
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210,000 |
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The lump sum payment
will be related back at constant rate over 36 months ending
on the cessation date of employment, as this date is earlier
than the date of entitlement to the payment.
Also see more examples under "About
Termination Payment". |
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